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Dear Mr. Berko:

– R.Y., Port Charlotte, Fla.

Dear R.Y.:

I’ve always liked master limited partnerships (MLPs) in the oil and gas distribution business. I like their tax-favored high dividends, and I like the simplicity of their business model. This is a homogeneous group in that the participants are involved in moving oil and gas from producers and refiners to distributors and/or consumers.

These MLPs have a favorable tax status. They pay out almost all of their cash flow as “distributions” (not dividends) and therefore have significantly higher yields than bonds or common stock. The limited partners (you) do not pay taxes on the distributions. Rather, you pay taxes based upon your proportionate share of the partnership’s taxable income, which is hugely less than the cash distribution you receive.

But if you are one of those Internal Revenue Service aficionados who likes to get his tax return in by January or February, you’ll get a serious case of the heebie-jeebies if you own an MLP. For reasons unknown and not explained in either the Old or New Testament, MLPs usually wait until April to provide you with tax information. And the confusing, muddy paperwork they post will give most tax preparers a case of the “shivering fits.” However, if you own the right oil/gas MLPs, those generous distributions will keep you warm all winter and cool all summer.

Usually, each dollar of distribution income is subject to a tax of between 10 percent and 15 percent. Though the administration will allow the current 15 percent tax rate on dividends to expire next year, I’m almost as certain as Satan that the taxation on MLP distributions will remain unchanged.

But in this high-debt environment, I’d not be surprised if Congress changed the rules. Nor would I be surprised if those 535 bloviaters on the Hill raised taxes on personal incomes for most Americans next year.

Sam “Sammy” Spade, who helped me get my first job bronzing baby shoes in 1952, was a top analyst at Thomson & McKinnon Securities until it was assimilated by Prudential in 1989. We’ve remained friends, and he believes the following MLPs have “uncommonly above-average, long-term potential.”

Teekay Offshore Partners LP (TOO — $19.36) provides marine transportation and storage services to the offshore oil industry. With a fleet of 37 shuttle tankers, TOO cruised to $800 million in 2009 revenues and a $1.80 distribution yielding 9.3 percent.

Regency Energy Partners LP (RGNC — $19.76) provides wellhead-to-market service to natural gas producers, processes raw natural gas into natural gas liquids and provides turnkey natural gas compression service in Texas, Arkansas, Louisiana, Kansas and Oklahoma. RGNC’s $1.4 billion in revenues produced a distribution of $1.90 yielding 9.6 percent.

Enbridge Energy Partners LP (EEP — $52.37) owns 14,300 miles of pipeline that produced $7.5 billion in revenues last year and a distribution of $3.96, giving shareholders a yield of 7.6 percent. EEP pushes crude oil, liquid petroleum, natural gas and liquid natural gas through its pipelines. EEP also owns 11 processing plants, as well as trucks, trailers and railcars for transporting natural gas liquids, crude oil and carbon dioxide.

Over the past dozen years, most oil and gas pipelines have fared fairly well and have continued to pay moderately increasing high distributions. Though these three issues (and there many other excellent ones) are not considered investments for widows and orphans, sometimes you just have to stick your neck out on a limb. And in this instance, I think 100 shares of each will be a plum in your hat.

However, I am not in the portfolio business. You should consider employing a money manager who has the time, knowledge, experience and maturity to guide your mother’s portfolio.

Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, Fla. 33775 or e-mail him at mjberko@yahoo.com. © 2009 Creators.Com